State legislators are going to be tempted to follow the dictate of that fiscal expert Mae West who famously opined that “too much of a good thing is wonderful.” Of course, the film star wasn’t talking about state budgets, but many states may soon be tempted to follow her advice as the economy continues to rebound.
As the Wall Street Journal notes, a study by the Nelson A. Rockefeller Institute of Government at the State University of New York found that tax collection rates in the 45 states that have reported results for the first two months of the year. If that pace holds, tax collection rate will have had their biggest gain since 2006, well before the recession started.
But before people start popping champagne corks, there are a few things to remember. First of all, the states are still in dismal financial shape. According to the Center on Budget and Policy Priorities, at least 44 states and the District of Columbia are projecting shortfalls totaling $112 billion. Most are proposing to bring spending back to pre-Recession levels.
What about the additional tax revenue? Odds are most of it will go toward paying down debt. There will no doubt be plenty of calls to restore cuts made to politically popular programs such as environmental protection, education and transportation because states can now “afford” to be more generous. Municipal unions, in particular, may be tempted to unfreeze wages and restore benefits that have been cut in the name of fiscal austerity. Unfortunately, none of that will happen since most states remain in terrible financial shape.
For example, Nevada, one of the state’s that has been hardest hit by the economic slowdown, is projecting a 2012 budget deficit of $1.5 billion, equal to 45.2% of the previous year’s spending plan. New Jersey, where Gov. Chris Christie (R) has vowed to bring order to the state’s chaotic finances, is expected to have a $10.5 billion 2012 shortfall, equal to 37.4% of the 2011 budget. California Gov. Jerry Bown (D) is trying to convince Republicans in the Legislature to extend some temporary taxes to address the state’s whopping $25.4 billion projected shortfall for FY 2012, equal to 29.3% of spending plan enacted for 2011.
“Of course, a faster-than-expected recovery could reduce the size of future shortfalls.,” according to CBPP. “But several factors could make it particularly difficult for states to recover from the current fiscal situation. Housing markets might be slow to fully recover; their decline already has depressed consumption and sales tax revenue as people refrain from buying furniture, appliances, construction materials, and the like.”
Indeed, trillions of dollars in corporate cash remains on the sidelines since executives are finding it more cost-effective to make acquisitions, bolster their balance sheets and hike their dividends rather than hire new workers. Though unemployment has dropped below 9% nationally, it remains at double-digits in some areas of the country. For states, this means that budgets will be stretched thin even for essential services such as police and fire protection.
About the only positive thing about the increased tax receipts is that it lessens the odds of municipal defaults that some, such as Wall Street analyst Meredith Whitney, had predicted. The odds will widen further if the trend continues for the rest of the year. For state workers whose livelihoods depends on government spending, that’s not much concellation.
–Jonathan Berr
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